Real Options Conference 2024

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Optimal Entry Deterrence By An Incumbent Under Uncertainty

The objective of this paper is to study an incumbent-entrant model under uncertainty. The entrant knows the realization of the random variable(s) before it makes its decision on entry and eventual capacity choice. So all the uncertainty is on the incumbent's side. The sources of uncertainty include the characteristics of the entrant's product and the entry cost the entrant needs to incur before becoming active. We know from the literature that the incumbent-entrant setup could result in three different outcomes: blockaded entry, i.e., the incumbent behaves like a monopolist and the entrant does not enter, deterred entry, i.e., the incumbent overinvests to make the market unprofitable for the entrant, and accommodated entry. The main result from our work is that under uncertainty there can be four outcomes: apart from blockaded entry and accommodated entry, it can be either 100% entry deterrence or entry deterrence with a certain probability.

Richard F. Hartl
University of Vienna

Peter Kort
Tilburg University

Stefan Wrzaczek
IIASA, Laxenburg


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